There are plenty of potential effects of QE.  That’s why the paper I’m trying to write at present is spiralling out of control (the problem: making it explicable for the layman and challenging for the policy maker).  QE may have no great effect on yields, or it may cause inflation, or it may end up in Japan style permanency.

What if the result is a bit more inflation a bit more quickly than expected?  Gilts would be lower, yielding more. The result would be the Bank having bought £200bn of gilts for £200bn, having to sell them back at, say, £190bn.

My question is: how would this loss be made up?  a. in taxes or b. in just letting the reserves stay out there?  (because in effect the Bank will have produced £100 of reserves and only got £90 back, say).  One I hope Duncan has some insight on (read his post for a good sign of what QE is really achieving).

If the QE does NOT produce losses – say, there is continuing deflation – then the Bank holds the gilts for a long time.  Which means great profits for the BOE: cost of reserves = 0.5%, interest earned = 3.5%, so £6bn per year, say.

So if the losses can be monetized, and the profits pocketed by the govt, the Bank seems to have become a more valuable thing through QE.  Am I right?

(by the way, I hope Chris would now agree that the pattern of the Bank’s hawkish statements make his earlier hope that just the announcement of QE could raise inflation expectations unlikely:

“3. There’s little point doing QE in private. The point of QE is to prevent severe deflation. This is best done by raising inflation expectations, which in turn is best achieved by making as much of a song and dance about printing money as possible. Indeed, in theory it’s possible that the announcement of QE alone would be sufficient to raise inflation.”)

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4 thoughts on “Question: Bank of England losses on QE – how are they made up?

  1. I think you’re right. Monetise any losses and pocket profits (although prob BOE rather than Govt, it does have it’s balance sheet and reserves).

    But we’ve got so little historical precedent, that it’s hard to say!

  2. Thanks Duncan – you can be my litmuss test – if there is any uncertainty at all, then I think it is a question the HOC Treasury committee should be putting to them . . .

    right now, so annoyed by Cameron speech I can hardly think straight

  3. >right now, so annoyed by Cameron speech I can hardly think straight
    Realise this is a bit off message (in more senses than one), but surely the speech you should have been really annoyed with was Clegg’s.
    Politics is played in black and white.
    As such, Cameron’s positioning is predetermined. With Labour fumbling in the grey scale, Clegg had the rare chance to play white. He funked it or didn’t see it. For which ever reason, he demonstrated poor leadership.
    The right (and honest) economic strategy would have been hard to argue given that 99% of the media have bought the need to cut the debt NOW but it would have been the honourable, the liberal and the best cause to fight.

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